It's Not That Big a Deal

How Should We Protect Our Environment?

About a month ago, I was talking with some friends on the beach and the topic of environmental regulation came up. When I mentioned that I disagreed with strict environmental regulations and subsidies, it became less of a conversation and more of a melee. I found myself frustratingly inarticulate (3 hours of sleep and a bottle of wine) and was unable to give my argument the explanation I thought it deserved. This essay fulfills my promise to clarify some of my ramblings and, more importantly, it details what I believe to be the best strategy to address environmental concerns. For arguments sake, let’s set aside any disagreement over the disputed realities of climate change and its respective causes.

As I see it, there are two types of motives for conservation: one is economic, the other political (though we might also consider it emotional). The former is aimed at establishing that natural resources have utility beyond that which can be obtained by harvesting them. For example, a specific fish population is valuable to us not only as food, but also in the ocean, since it plays a part in the larger ecosystem upon which we depend. The latter might be described as conservation for conservation’s sake. It is not only common, but expected for world leaders to address climate issues by wielding political power (the UN recently met for its 21st conference on climate change since 1995). This has nothing to do with promoting efficiency and everything to do with satisfying an agenda. I feel comfortable saying this because there is a very clear, simple solution to environmental degradation—at least on the national level.

A sound environment is valuable to all of us. There is no doubt that rapacious consumption of natural resources would lead to adverse and possibly catastrophic consequences. The difficulty lies in the fact that the costs of environmental degradation are not always apparent, nor are they isolated to specific locations or populations. When people consume natural resources or conduct activity that pollutes, and don’t compensate society for the entirety thereof, they are externalizing part of their costs. This externalization is tantamount to a subsidy, and a particularly difficult one to measure at that. For this reason, we cannot rely strictly on a free-market system to sort out environmental issues. In this, government can be a useful tool because it has the unique ability to tax.

I am of the mind that environmental protection is the most worthwhile capacity in which the government can be involved in the economy. There is, however, a right and a wrong way to go about achieving such goals. The wrong ways are through subsidies and quota-based regulations that encourage market inefficiencies and prioritize certain industries unfairly. The right way is through corrective taxation: a process by which environmental costs can be accounted for and passed on to the consumer. This can be achieved by traditional pricing methods and non-market valuation.

It would be disingenuous of me to present this as a novel idea. Most of us have heard of corrective taxation, though perhaps not by that name. The most notable examples are probably carbon tax proposals, whereby producers would be held accountable for the cost of carbon output during their production, ultimately passing that cost on to the consumers (it is also used for non-environmental purposes, such as in the case of so-called “sin taxes” applied to curb consumption of alcohol, tobacco, etc.).

A bleeding heart may object that no price can be put on clean drinking water, the rainforests, atmospheric carbon content, etc. They are, of course, incorrect. An easy way to do this would be to calculate the cost of correcting the damage caused. For example, let us stipulate that the consumption of 1 gallon of gasoline produced negative environmental effects that would cost $0.50 to fix. Adding a $0.50/gallon corrective tax to the final cost of gasoline would compensate for these impacts. This would accomplish 4 goals:

Internalizing costs that were previously externalized

Procuring funds to alleviate the impacts of environment-harming consumption

Curbing demand for environmentally harmful products

Promoting the most efficient products—thus increasing quality of life

The market is the most valuable tool we have in the effort for conservation. It incorporates the best rationing mechanism humanity has yet to devise: price. The answer is not to try to circumvent this process, but rather to help it more accurately reflect reality and then use it as a tool to determine how resources should be consumed. Unfortunately, much of the current rhetoric surrounding environmental protection pays little heed to the dismal science. Rather than address these issues through the price system, some prefer arbitrary quotas and subsidies. The inferiorities of such policies are legion, but I’ll have to content myself with addressing their main deficiencies.

The purpose of economics is to promote the most efficient use of resources, natural or otherwise. Creating a quota or cap that cannot be surpassed distorts this process. The reason for this is that circumstance may dictate that an object’s value changes from one time to another. Quotas do not–and cannot–take this into account because they aren’t receptive to demand. No matter how well calculated a quota is, it can’t respond to shifts in the economy or ecosystem.

For a thought experiment, pretend that with the intention of preserving forestry, there is a forest of 500 trees that cannot be cut down. No one would deny that those trees have utility in the forest: they provide shelter to animals, filter water and carbon, and much more.

However, when something changes, those same trees could be better utilized in another capacity. If, for example, a nearby railroad track which was the only means by which to reach a city were to be destroyed it may very well be that some of the trees are more valuable as railroad ties, and thus should be extracted from the forest and put to that purpose.

How can we know if this is the case? If there is a strict prohibition on harvesting the trees, it’s a non-starter. No amount of demand can warrant the removal of the trees from the forest. However, if we have a complete account for the value of the trees in the forest and can incorporate that into the price of the wood (passing that cost on to the consumers as an internalization of the environmental loss), we can form a clearer picture. All we would need to do is weigh the value of the trees in the forest against their value as railroad ties—ultimately a means by which to get goods–upon which some of them may be dependent–to people.

What is the forest’s integrity worth? What if there is urgently needed medicine on board? What if a store is waiting on a shipment of laptops? Where is our tipping point in this decision? These are questions we can answer with non-market valuation (the process by which we will determine the value of the trees) and price, if given the opportunity.

It may sound implausible or perhaps even unethical; I assure you that it is neither. This is the way that we have been deciding how resources are consumed and procured for centuries. There is a huge network of cooperation in which materials (or anything) are directed by the price people are willing to pay for them. This system is one of the greatest advantages of a market economy, and it is so far unmatched by any centralized model.

The purpose of this thought experiment is to underline that decisions are made on an equilibrium; there is a point at which even a very large cost becomes the more attractive of two options. This same scenario can be extrapolated to Arctic drilling or mining coal. These aren’t things that people (or corporations) just do for no reason. To deride them for being “profit-hungry” is to miss the point. They can make money doing those things because those things are the means to achieve an end that people value; in this case, everything from turning on the lights to staying warm in the winter. However, we should make sure that the full cost of such activity is passed on to the consumer.

The point I’m trying to make here is that strict regulations that implement quotas or prohibitions take whole options off the table—and that’s not a good thing. The concept of utility is utterly absent from such approaches. They lead to inefficient allocation of resources, which can mean anything from waste to starvation to loss of life. Our conservation efforts should be aimed at promoting the greatest quality of life for people, while acknowledging that a sound environment plays a part in that equation.

Subsidies are equally villainous, even when used for industries that we consider to be “good”. Instead of propping up inefficient industries (if they were huge successes, as people claim, they wouldn’t be reliant on subsidies) while sometimes aggravatingly continuing to subsidize the “bad” alternative, we should let the market do its job, once we have put effective environmental taxes into place. The government should not be picking winners and losers. Doing so precludes the development of innovative technologies in the future and reduces industry competition.

Think about it. If the cost of oil plus a corrective tax to produce a certain amount of energy is still exceeded by the cost of producing that amount of energy through solar panels, why not take the first option? The point of technology like solar panels is to be more efficient and ultimately lower costs. If it isn’t, it’s not doing its job and it needs to become more competitive. Human labor and capital, represented in this exchange by money, are also valuable resources and there is no sense in wasting them. After all, we want our lives to improve, not worsen.

This is politics, though. Instead of a rational approach to curbing emissions, we are treated (read: subjected) to bureaucratic tendencies to measure input instead of output when crafting policy. Indeed, as Ira Stroll points out, Clinton’s plan to set up half a billion solar panels across the country conflates a means with an end. Having a lot of solar panels is a ridiculous goal. Lowering emissions is a smart goal, the solution to which can rely partly on solar development, as well as other industries–some of which may not even exist yet. There is no reason to divert resources to a politically favored product that isn’t yet competitive. As Stroll points out, that would be a great way to prematurely litter our country with inefficient infrastructure.

Subsidies are additionally invidious because they often involve perverse transactions of wealth from the poor to the wealthy. If the government is going to be involved in redistribution, it should be to support the poor. When users of advanced, expensive technologies enjoy tax credits and direct subsidies, they are doing so at the expense of less wealthy tax/rate payers. The kind of corrective tax I am proposing would also be of a regressive nature, as is any tax on consumption. In order to offset any damaging effects on the poorer taxpayers, tax credits could be issued to cover some of the accrued costs. Or perhaps our progressive tax system will be enough to offset any adverse effects spurred by this consumption tax.

Perhaps the greatest advantage of a such a program would be its simplicity. I think it’s a safe assumption that a program like this could eliminate a lot of the overhead cost associated with environmental overhaul. Importantly, it eliminates the top-down central model that ignores basic economic realities and puts progress in the hands of individuals. History has a lot to say on the benefits of markets. Who knows how much time, effort, and money could be saved by circumventing the regulatory web woven by ever increasing branches of federal and state governments?